Credit and Credit Cards

Credit Cards

Many Americans find using credit cards essential for managing their daily financial life, and credit card use is a staple for many students. Credit cards are often more convenient that using cash, particularly for large purchases, but you should take care to use credit responsibly.

Understanding Credit Cards

Credit card use has both positive and negative repercussions:

Pros

Cons

Reliability: When making certain types of payments (such as online payments), there is added safety built into using your credit card verses a debit card. Also, some situations, such as renting a car, may require the security of a credit card.

Debt: Misuse can lead to excessive personal debt and a poor credit history.

Safety: It is often safer to carry a credit card versus carrying large sums of cash.

Emergencies: Credit cards can provide additional funding when you are in situations that require more physical funds than you have available.

Fraud: Credit cards may be stolen and used fraudulently.

Credit History: Having a credit card account in good standing will help you build a positive credit history.

Too easy to use: Credit cards are often too easy to use when repayment options are not fiscally viable.

Know the Lingo

Choosing to open a credit card account, or deciding which card to use from those that you have, can often be quite tricky. Before making a decision, it is important that you understand the terms credit card companies use. Once you understand the different terms, you’ll have a better understanding of exactly what you are borrowing and how it will affect you.

Credit Concepts and Terms

Guidelines for Credit Card Use

Keep your balance as low as possible.

Avoid borrowing more than 20 percent of your gross income.

Try to pay off your balances each month. If this is unobtainable, try to pay off as much as you can to decrease the amount of interest that you accrue.

Sticker Shock: How much does that new laptop really cost?

When making purchases using a credit card, make certain that you are aware of the total cost you will pay over time. Calculator Web provides an online credit card calculator that can help you get a better understanding of how quickly interest can build when payments are extended and how long it will really take to pay off a purchase when making the minimum payment.

For example, suppose you need to purchase a new laptop for your first semester at UMUC. You choose a great model with a $1,500 sticker price. You don't have enough available cash, so you decide to purchase it with your credit card, which has an 18-percent interest rate and requires a minimum monthly payment of $30. Paying only the minimum per month, it will take you 7 years and 10 months to pay off your computer. The actual amount paid for your laptop will be $2,792.

Try using the calculator with your own credit purchases.

Monitoring Your Credit History

Your credit history is a running record of your past and present financial transactions—think of it like your academic transcript for your financial life. It is important that you monitor your credit history regularly as potential lenders will use your credit history to evaluate your creditworthiness.

You can obtain a FREE copy of your credit report annually by visiting Annual Credit Report. You can request a credit report once every 12 months from each of the nationwide consumer credit reporting companies:

By obtaining your credit report, you will be able to make sure the information reported on your credit history is accurate and up-to-date.

Credit Scoring

We recommend that you use the Annual Credit Report Web site and not a "pay-for-service" site to obtain your free credit report every 12 months. If you find incorrect information on your report, you have the right to dispute the findings. You must contact the credit reporting agency directly that provided the information. Each of the major three credit bureaus offers the option to dispute a record online through their Web sites.

Also, remember to keep copies of anything you submit for review to the agencies. Disputes are typically reviewed in 30 days unless otherwise stated.